Shutterstock's Content Redistribution Platform Is No Winning Strategy

The adage ‘content is king’ is true more so now than perhaps ever before. Media companies crave unique content, individuals can create content easier than ever before, and consumers can access content through a multitude of outlets. However, not all content is created equal. Original content, whether it be videos, images, or both, while costly, can be highly profitable. On the flip side, redistributing others’ content is not only undifferentiated, but also not a winning business strategy. This firm’s content redistribution platform, coupled with declining profits and overvalued stock price land Shutterstock (SSTK) in the Danger Zone.

Revenue Growth Hides Profit Decline

Shutterstock’s economic earnings, the true cash flows of the business, have declined from $34 million in 2012 to $23 million in 2015, or -12% compounded annually. This decline comes despite revenue growing from $170 million in 2012 to $425 million in 2015, or 36% compounded annually. Figure 1 highlights the disconnect between revenue and cash flows. See the reconciliation of Shutterstock’s GAAP net income to economic earnings here.

Figure 1: SSTK’s Profits Decline Despite Revenue Growth

Such impressive revenue growth doesn’t seem so impressive when one realizes it’s a byproduct of unsustainable spending. Since 2012, while revenue has grown 36% compounded annually, R&D, sales and marketing, and G&A expenses have grown 36%, 33%, and 42% compounded annually respectively. Cost of revenues has grown 39% compounded annually over the same time. Essentially, revenue growth fails to outpace the cost to grow that revenue, which is not a sustainable long-term strategy.

Over the past three years, Shutterstock has generated cumulative -$48 million in free cash flow. Additionally, the company’s return on invested capital (ROIC), which was once an astounding 899%, has fallen to 34% over the last twelve months.